With Merger Deal, Blackstone, Starwood Bet on Being America’s Biggest Home Landlord

By Ryan Dezember

Two of the country’s largest rental-home owners have agreed to merge in a deal that would create a giant landlord with roughly 82,000 homes in 17 metro areas, according to people familiar with the matter.

Blackstone Group LP’s Invitation Homes Inc. and Starwood Waypoint Homes plan to combine in a bid to gain scale and operating efficiencies in markets that include Atlanta, Miami and southern California, these people said.

The deal between the publicly traded real-estate investment trusts is the biggest yet in the rapidly consolidating institutional rental-home business, which sprouted from the foreclosure crisis when big investors raced to buy homes at steep discounts.

The combined company, which will keep the Invitation Homes name and be led by Starwood Chief Executive Fred Tuomi, would be the country’s largest private owner of single-family homes by a wide margin. American Homes 4 Rent, which was founded by self-storage magnate B. Wayne Hughes, owns about 49,000 houses in 22 states.

Under the terms of the agreement, Invitation Homes shareholders will own 59% of the combined company’s shares while Starwood’s investors will get the remainder, the people said. The companies have a combined stock market value of about $10.7 billion, and about $9.5 billion in debt between them.

Blackstone took Invitation Homes public in January and owns about 71% of its stock, according to securities filings. The firm will own about 41% of the combined company’s shares, the people said.

The company’s C-suite, they said, will consist of a mix of executives from both firms and its board will be split with six directors, including Blackstone’s real-estate chief Jonathan Gray, coming from Invitation Homes, and five from Starwood, including its chairman Barry Sternlicht.

“This turned out to be a business,” said Mr. Sternlicht, who confirmed the merger with Invitation Homes. “When we started out I think there were a lot of people who didn’t think it was a business. They thought it was a trade.”

Mr. Sternlicht merged his rental-home portfolio last year with that of fellow real-estate mogul Thomas J. Barrack Jr. to create Colony Starwood Homes. The company changed its name last month to Starwood Waypoint after Mr. Barrack sold his stake in the firm.

Since the 2016 merger, the company’s shares have taken off. The stock is up 17% this year and has been trading around all-time highs this summer. Shares of Invitation Homes are up about 5% since its IPO.

Messrs. Sternlicht and Barrack had similar strategies to Blackstone following the mortgage meltdown a decade ago. They bought foreclosed homes by the thousand from the courthouse steps, often sight unseen, in markets predominantly in the Sunbelt and along the West Coast.

The investors targeted neighborhoods around fast-growing cities, with low crime rates and good schools, and bought homes that could accommodate families and were fairly new and thus easier and cheaper to maintain. After fixing them up, sometimes at significant expense, they rented them out. These days, they are buying houses at a slower pace, usually on the open market.

While many investors that followed similar strategies have sold out now that home prices in some markets have surpassed their 2006 peaks, Blackstone and Starwood’s founders have been among the few that decided to stick around in a bid to institutionalize single-family rental homes, as they did office towers, shopping centers and apartments before.

Their near-term wager is that home-building will continue to lag demand and that bad credit, a lack of savings and tight lending will keep many renting. Long-term, they are wagering that homeownership will no longer be an essential component of the American dream.

By some measures, U.S. homes are the biggest asset class in the world. Their collective value of nearly $25 trillion is greater than that of all the shares on the U.S. stock market and about double the worth of marketable Treasurys, according to Amherst Capital Management. And they are among the most diversely owned. The rental-home business, which has existed for decades, is nearly as fragmented as homeownership itself, having long been dominated by mom-and-pop operations and local investors, most of whom own just a property or two.

Analysts estimate that institutional investors own about 200,000 houses throughout the U.S. That is less than 2% of the estimated total of rental homes, yet the merger will create in some markets a mega landlord, the likes of which hasn’t been seen. In Atlanta, the firm will own more than 12,000 houses. Around Miami it will own more than 9,000, and 8,000 in southern California suburbs and near Tampa Bay.

Market density is key to the business plan. The more homes owned in proximity to one another, the more efficiently leasing agents, maintenance crews and contractors can work. The firms’ combined holdings should also make for cheaper financing. And a larger company could mean inclusion in big stock indexes.

The companies believe they can achieve tens of millions in so-called synergies by combining, Mr. Sternlicht and other people familiar with the matter said.

They overlap in ten of their combined 17 markets. About 70% of the merged company’s revenue comes from the West Coast and Florida, though Seattle, Chicago, Phoenix and Texas are also big markets.

Mr. Sternlicht said he proposed the merger after the two companies bid against each other for a batch of homes, with many in California.

“We realized this is silly,” he said. “Combining is better than competing with each other forever.”

Write to Ryan Dezember at ryan.dezember@wsj.com

Breaking the story

Ryan Dezember was first to report on Blackstone Group LP and Starwood Waypoint Homes plans to combine. According to sources, the merger would create the country’s largest private owner of single-family homes with roughly 82,000 homes in 17 metro areas. The deal was later confirmed via company press release.

Timeline

August 10, 2017, 6:34

With Merger Deal, Blackstone, Starwood Bet on Being America’s Biggest Home Landlord

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